Open House by Jim Woodard

Reverse mortgages are becoming riskier for senior homeowners, due to the rising number of shady operators who are marketing these programs. The trend has prompted the National Consumer Law Center (NCLC) to issue a special report, "Subprime Revisited: How the Rise in the Reverse Mortgage Lending Industry Puts Older Homeowners at Risk."

Reverse mortgages are special loans, making it possible for seniors over age 62 to receive monthly payments (loan payout segments). The loan is secured by the equity in their home. In most cases, the seniors can receive the payments for as long as they live and reside in the home. Some plans offer alternative options of taking a lump sum or a line of credit, or combinations thereof.

Costs related to obtaining such a mortgage are substantial, but a growing number of seniors are signing up for reverse mortgages. About 110,000 units are now sold annually. It's grown into a $17 billion industry, and that attracts all kinds of companies and individuals who offer and aggressively promote the product.

"In the reverse mortgage market, seniors now face some of the same aggressive lending practices that were common in the subprime lending boom," said Tara Twomey, a NCLC attorney.

Here's a quote from the NCLC report: "Many of the same players that fueled the subprime mortgage boom — ultimately with disastrous consequences — have turned their attention to the reverse mortgage market. Lenders, including some of the nation's largest banks, view that market as a source of profits that have dried up elsewhere.

"Mortgage brokers see it as a new source of fees. Predators who once reaped profits from exotic loans have now focused on wresting more wealth from vulnerable seniors," the report stated.

The report calls for the extension of protections related to all reverse mortgage and other equity conversion products aimed at seniors. It also calls for a prohibition on yield spread premiums and other perverse incentives in the reverse mortgage market. The report highlights the danger of predators who use reverse mortgages as tools in schemes to steal the home equity of unsuspecting seniors, or to fund the purchase of expensive insurance and financial products that pay high commissions.

A "yield spread premium," or YSP, is a fee paid by the lender to the broker in exchange for negotiating an interest rate higher than a normal market rate, thus generating a higher profit for the broker.

It should be noted that a well-structured reverse mortgage plan can be beneficial to some seniors.

And there are capable and ethical firms and representatives offering such plans. But there are also a growing number of unethical profit-grabbers. The bottom line: Study and double-check any reverse mortgage plan being considered, and compare it with several other competitive plans.

Q: What are FHA mortgage guidelines regarding required income of borrowers?

A: One of the key guidelines for home loans insured by the Federal Housing Administration (FHA) relates to the loan amount an FHA applicant is eligible to receive. This, of course, is tied to the borrower's household income.

The FHA loan officer will look closely at the mortgage's monthly payment in relation to the borrower's income and debt obligations. The FHA will want the borrower's mortgage payments (including principal, interest, property taxes and property insurance) to be no more than 31 percent of the family's gross monthly income.

The borrower's total debt obligations — mortgage, credit cards, auto loans, student loans and others — cannot exceed 43 percent of the family's monthly income. These ratios are more generous than those required by most non-FHA mortgages in today's market. Even better terms and ratios are available to buyers of energy-efficient homes.

Let's review a few other key FHA guidelines:

Down payments can be as low as 3 percent of the purchase price. A property appraisal is required for all FHA mortgage loans. The applicant must disclose all "sales concessions" to the appraiser. This may include the seller paying for such cost items as discount points or origination fees, interest rate buy-downs, closing cost assistance and builder incentives.

The closing costs that FHA considers to be reasonable include lender origination fees (up to 1 percent of loan), attorney's fees, appraisal fees, home inspection fees (up to $200), title insurance, property survey, credit reports and transfer and recording fees.

In most cases, credit scores above 620 will be acceptable. There is no established national limit for the amount of an FHA mortgage. The amount is based on the median cost of homes in the local area. That amount is usually adjusted annually.

These are general guidelines for processing an FHA mortgage application. Keep in mind they do change from time to time. For more information, particularly related to the situation of individual applicants, consult with an FHA mortgage loan officer.

To find out more about Jim Woodard and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

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